27 September 1994 External T.I. 9423895 - PERIODIC PAYMENTS DUE ON RETIREMENT

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

Principal Issues:

Whether periodic amounts due upon early retirement are taxed in year of retirement on present value or taxed as received.

Position TAKEN:

Taxed as received (as one of several possible types of income) unless periodic payments arise from annuity purchased in name of employee in which case taxed in year annuity purchased.

Reasons FOR POSITION TAKEN:

Not taxed to individual in year on present value unless individual entitled to the full amount in the year; periodic payments taxed as received.

XXXXXXXXXX 942389

Attention: XXXXXXXXXX

September 27, 1994

Dear Sirs:

Re: Periodic Payments Due On Early Retirement

This is in reply to your facsimile transmission of September 15, 1994, in which you ask our opinion concerning the taxation of periodic amounts to be received by an employee after loss of employment.

Your request relates to a specific proposed transaction involving actual taxpayers. As indicated in Information Circular 70-6R2, we do not express opinions on specific proposed transactions other than as a reply to an advance income tax ruling. We will, however, offer the following general comments.

The amount you describe which will be paid to an employee who is taking early retirement could be characterized as employment income taxable in accordance with subsection 6(3) of the Income Tax Act (hereinafter referred to as the "Act"), as pension income taxable pursuant to subparagraph 56(1)(a)(i) of the Act or as a retiring allowance taxable under subparagraph 56(1)(a)(ii) of the Act. Alternatively, if an amount is set aside by the employer to fund the periodic payments, the funding could give rise to a "retirement compensation arrangement" (RCA) as defined in subsection 248(1) of the Act. Amounts contributed to an RCA and the earnings thereon are subject to a refundable tax in accordance with Part XI.3 of the Act, and the employee will be taxed on amounts received out of the RCA under paragraph 56(1)(x) of the Act.

Generally, where an employer promises to pay an amount in the future, the employee would not be taxed on that amount until received. On the other hand, where an employer arranges the funding of the payments through an annuity contract in the name of the employee, the employee would be subject to taxation on the value of the annuity in the year it is purchased by the employer.

Although the foregoing comments are not binding on the Department, we trust they are helpful. If your client is contemplating a specific series of transactions, we would be pleased to consider it in response to a request for an advance income tax ruling.

Yours truly,

for Director
Financial Industries Division
Rulings Directorate
Policy and Legislation Branch